How to Calculate Mortgage Insurance (PMI)

This article was co-authored by Carla Toebe. Carla Toebe is a Real Estate Broker in Washington. She has been an active real estate broker since 2005, and founded the real estate agency CT Realty LLC in 2013.

There are 7 references cited in this article, which can be found at the bottom of the page.

Private mortgage insurance (PMI) is insurance that protects a lender in the event that a borrower defaults on a conventional home loan. Mortgage insurance is usually required when the down payment on a home is less than 20 percent of the loan amount. Monthly mortgage insurance payments are usually added into the buyer's monthly payments.

Find the purchase price. Even if you are just beginning to look for a home, you probably already have a good idea about the price of the home you can afford to purchase. The purchase price of the home will help you determine your loan-to-value ratio.

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Determine the loan-to-value (LTV) ratio. The loan-to-value ratio is a simple way for lenders and insurance agents to calculate how much you've paid and how much you owe. The LTV ratio is calculated by taking the amount of money you borrowed on the loan and dividing it by the value of your property. The higher the LTV, the more your mortgage insurance will cost.[1]

For the purposes of this article, let's assume a loan amount of $225,000. Say you're buying a house that costs $250,000 and you've put 10% down on the house, or $25,000. Because you've only paid 10%, and 90% is still outstanding, your loan is $225,000 and your loan-to-value ratio is 90 percent.

Determine the terms of the loan. The type and length of your loan can also play a factor in the mortgage insurance amount. Shorter loans require lower rates of the mortgage insurance. However, a 30 year loan is the most popular time period. Similarly, fixed loans cost less than adjustable-rate loans.

If you have a Federal Housing Association (FHA) loan, you will have a type of insurance called Mortgage Insurance Premium (MIP) instead of PMI. This is still a type of mortgage insurance, but the structure of the loan is slightly different. Be sure to read the terms of the loan carefully to understand how MIP might be calculated for you.[2]

Determine the mortgage insurance rate. PMI fees vary, depending on the size of the down payment and the loan, from around 0.3 percent to 1.15 percent of the original loan amount per year.[3]

The easiest way to determine the rate is to use a table on a lender's website. If you are already working with a lender, you can use the one on your lender's website. If you do not yet have a lender, you can still find a calculator online to estimate the rate. One such calculator can be found at mgic.com/ratefinder.[4]

Understand that your mortgage insurance will "fall off" if you build up enough equity in your home. You don't need mortgage insurance indefinitely. Once you've built up 20% equity in your home (i.e. your LTV is 80%) you can request to cancel your mortgage insurance.

Keep in mind that lenders won't automatically cancel your mortgage insurance until your equity reaches about 22% based on the original appraisal of the home.[5]

Don't wait for the lender to cancel the insurance for you. Do it yourself once you reach a 20% equity stake in your home. The lender will need an appraiser or real estate agent to give them a valuation before the insurance can be canceled.

If you have an FHA loan, you need to have paid 22% of the mortgage before you can cancel the insurance. You also need to have made five years of monthly payments before it can be removed.

Know that your credit score will also affect your mortgage insurance. Just like your credit score affects your ability to get approval for loans, it also may affect your ability to get good rates on mortgage insurance rates. Those with lower credit scores may not get rates as favorable as those with high credit scores.

Understand that some lenders may waive MI altogether if the buyer agrees to a higher interest rate. Some lenders will allow you to purchase a mortgage without insurance if you agree to pay more interest on the life of the loan. Anywhere from .75 to 1 basis points more is normal, depending on the down payment.[6]

This is a tradeoff. Most people will pay more money in the long run, since the interest rate hike applies for the whole mortgage. Again, the mortgage insurance only lasts until the buyer has pumped enough equity into the home. You'll most likely end up paying more if you make this tradeoff.

At the same time, this tradeoff does come with one perk. The payments you make on your interest are tax deductible, whereas the payments you make on insurance premiums are not, unless you took out your mortgage after Jan 1, 2007 and your Annual Gross Income (AGI) does not exceed $109,000. If you fit this category, you can reduce your AGI by 12 times your monthly PMI payment. So in these parameters, it is deductible.

Community Q&A

Current market value is used. It must be a recent appraised value by a certified appraiser or a current market analysis provided by a Realtor, and the lender will choose who will do this when you request a removal of this insurance.

The cost of Title insurance varies from state to state, insurer to insurer, and depends upon whether you are covering both the lender's risk and the owner's equity in the property. You can expect to pay 04% - 0.8% of the mortgage value for the insurance.

Yes, ask the lender to cancel PMI when you have reduced the mortgage amount to 80% of the original appraised value. By law, the lender must automatically cancel PMI when the mortgage amount reaches 78% of appraised value.

If I buy a home for $340k, including taxes and interest, then it appraises at $400k, would I have to pay the PMI on the contract and then request to stop the insurance?

Naji Boutros

Community Answer

If your property goes up in value, you can request that the bank conduct its own appraisal at your cost ($300-$500). If the property appraisal brings the loan to value below 80%, the bank, by law, must remove the PMI at your written request. This does not apply to investment properties.

I'm a new home owner. I bought the property for $557,000 and I put 10% down. Currently, I owe $490,000 and my home value is $600,000. Can I request that my bank appraise my property and remove the PMI?

Tips

Stop paying private mortgage insurance as soon as you can. The Homeowners Protection Act of 1998 requires that a lender must cancel mortgage insurance upon your request if you have paid on time and your LTV has reached 80 percent or less. You must request the cancellation. Under most conditions, lenders are not required to remove MI from your payment until you have reached 78 percent LTV unless you make a written request.

About This Article

This article was co-authored by Carla Toebe. Carla Toebe is a Real Estate Broker in Washington. She has been an active real estate broker since 2005, and founded the real estate agency CT Realty LLC in 2013.

To calculate mortgage insurance (PMI), identify the purchase price of the home and the loan-to-value ratio by taking the amount of money you borrowed on the loan and dividing it by the value of your property. Next, determine the mortgage insurance rate by using a table on a lender's website. Then, multiply the loan amount by the mortgage insurance rate to calculate PMI. To determine the monthly payment amount, divide the annual payment by 12.